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Musings on corporate finance, fund raising, debt capital and other matters

Altimapa Top Terms

Finance is full of jargon and technical terms. Here, in this guide, are definitions of the most commonly encountered terms in the world of alternative finance.

Alternative Finance: A broad term to describe the proliferation of channels, companies and instruments that have emerged outside the realm of the traditional financial system. It is most commonly associated with companies operating in the peer-to-peer space, such as peer-to-peer lending and crowdfunding. Often called “shadow banking” or “non-bank funding”.

Amortising Loan: A type of loan where a part or all of the principal is repaid alongside interest during the lifetime of the loan.

Asset-backed Loan: Debt where the security of the loan is specifically tied to an underlying asset. The range of assets that may be used as security can be wide, including property, inventory and trade receivables.

Bullet Loan: A type of loan where the entire principal of the loan is repaid at its maturity. Also known as an interest only loan.

Capital Structure: A term to describe the composition and relative rank of the instruments used to finance a company. The capital structure incorporates debt, hybrid instruments (such as mezzanine debt and preferred equity) and equity.

Direct Lending: The provision of debt capital to small and medium sized businesses (SMEs and MMEs) by private debt funds. Loan sizes tend to be significantly larger than those available in peer-to-peer lending, typically ranging between £2 and £100 million.

Factoring: A loan-like transaction, where a company sell its trade receivables to a third party. The sale of the receivables usually occurs at a discount, with the difference between sale price and notional value providing an effective interest to the purchaser.

Growth Capital: A type of hybrid-capital used to provide non-dilutive finance to rapidly growing firms. Typical growth capital investments will include a debt instrument, as well as an equity component in the form of a minority stake, preferred equity or warrant.

Institutional Investor: A term for financial or corporate entities that pool money, to be used for the purchase of securities (including loan origination), real property and other investment assets. The most well-known entities are banks, insurance companies, pension and hedge funds, real estate trusts, investment advisors and mutual funds.

Invoice Discounting: A similar source of funding to factoring, invoice discounting maintains the relationship between buyer and seller, with the collection of the cash remaining the responsibility of the company.

Junior Debt: Debt that ranks below senior bonds or loans but above common equity. Junior Debt instruments are often called mezzanine loans but can also be structure as preferred equity.

Loan-to-value (LTV): A measure of the value of a loan to the collateral against which it is secured. A €30million loan secured by a €50 million property would be described as a 60% LTV loan.

LMA (Loan Market Association): This association was created to assist the development of the secondary loan market in Europe. It intends to develop best practice and standard documentation. LMA Documentation is used as a starting point in many loan discussions.

Mid-market: A term typically defined by businesses with revenues of between €50 million and €1 billion (precise definitions can vary with different geographies and industries often having their own conventions).

Mezzanine: A subordinated loan that sits beneath (or is ‘junior’ to) senior loans in the capital structure. Mezzanine loans carry a comparably higher interest rate to compensate for the higher risk.

Payment-in-kind (PIK): A form of interest payment where, instead interest payments in cash, the value is rolled up into the principal of the loan. PIK loans are often used to reduce the cash flow burden of the debt on the borrower.

Peer-to-peer Lending: Debt financing where individuals lend money to other individuals or businesses intermediated by an online platform. Funds (typically £10,000-£500,000, with the average loan size around £60,000) are lent to small and micro businesses.

Private Debt Fund: A type of closed ended fund with the investment mandate of making loans to commercial entities.

Private Placement: A form of bond issuance which is traditionally used by large cap companies. Debt is negotiated directly with a small group of investors. Private placements are becoming increasingly used to finance SME and Mid-Market firms and are heavily supported by the European Central Bank as part of the Capital Markets Union.

Project Financing: Project finance is the financing of long-term projects based upon a non-recourse or limited recourse financial structure, in which the project debt and equity used to finance the project are paid back from the cash flow generated by the project.

Senior Loan: A loan that ranks above other debt and equity, giving the lender first recourse to all assets in the case of bankruptcy. For an investor, senior loans are the safest type of long-term financing and usually carry the lowest interest rate.

SME: Small and Medium-sized Enterprise (SME) is a broad term for all businesses that fall below a certain size. The European Union classifies SMEs as businesses with up to 250 employees or €50 million in turnover.

Supply Chain Finance: The provision of finance to the buyer of goods, often employed to smooth payments for suppliers. Also known as reverse factoring.

Term Loan: Carrying a predetermined interest rate, maturity date and repayment schedule (monthly or quarterly), term loans typically last between 1 and 10 years and are often borrowed with the intention of purchasing an asset that will generate the cash flow to service and repay the loan.

Term Sheet: A bullet-point document outlining the material terms and conditions of a business agreement. The Term Sheet will later be expanded into a full loan agreement but the key economic terms will not usually change once agreed upon.

Unitranche Loan: A single debt instrument that incorporates both a senior loan* and a mezzanine loan. They allow companies to increase the leverage in their capital structure, without needing to deal with multiple lenders.

Venture Debt: A fund invests money in a high-growth company to accelerate growth or pay for an acquisition. Unlike traditional borrowers, companies that take on venture debt are not required to be profitable or have significant assets to secure investment.

Warrant: An option that gives the owner the right to purchase shares in a company at a set price. Warrants are often used to cheapen the cost of debt for a borrower.